Pakistan’s stock market is doing well, says The Economist

• Report says Pakistan’s listed firms have a handsome average return on equity of more than 25%
• Market is cheap relative to its frontier-market peers with shares priced at 8.5 times earnings on average

Renowned British newspaper “The Economist” has said that despite political upheaval, Pakistan’s stock market is doing well and the appetite for local assets has been strong.

Praising the privatization policy of the government and stock market growth, the newspaper in an article in its Oct 24 edition said that since the start of 2012 MSCI’s index of Pakistani shares has risen by 60% in dollar terms-ahead of global indices as well as Pakistan’s peers among frontier markets, which are less liquid and less open to foreign capital than others.

It said the surprise is that the market did not fall further over the torrid summer. That was thanks largely to foreigners, who kept piling in even as jittery locals began selling. They bought a net $36 million worth of shares in August, when the protests were at their height, and a further $53 million worth in September.

The market’s bull run began in 2012 when a tax amnesty allowed previously hidden cash to be invested in stocks. Foreigners’ interest was piqued after elections in May of last year which led to the country’s first ever handover from one civilian government to another and the new one was seen as friendlier to business and took advice and credit from the IMF. It said that reforms were drafted and privatization scheduled, adding that a $2 billion bond issue this April was many times oversubscribed.

The Economist said that it was encouraging for a country more often seen as a cauldron of instability than as a fount of opportunity.

“Despite facing a number of problems, Pakistan is almost mid-table in the World Bank’s international comparison of the “ease of doing business”, scoring higher than either Brazil or India,” says the newspaper.

It said that Pakistan’s listed firms have a handsome average return on equity of more than 25%, adding that the market is cheap relative to its frontier-market peers, with shares priced at 8.5 times earnings on average.

Pakistan’s market also spans lots of industries with a variety of well-run firms in each, says Andrew Brudenell, who runs a $700m frontier fund for HSBC which has a tilt towards Pakistan. Such diversity is in part a product of successive governments’ habit of privatization by fits and starts: no fewer than 169 chunks of state-owned firms have been off-loaded since 1991.

It said the two most recent sales, in June, were of a 5% stake in Pakistan Petroleum, another oil firm, and of the state’s 20% shareholding in United Bank. The more shares that float freely, the bigger the weighting Pakistan earns in the stock market indices that act as industry benchmarks.

It is already the fourth-biggest frontier market, following the promotion of United Arab Emirates and Qatar to MSCI’s emerging-market index in June. This may explain the continued buying of its stocks during the turbulent summer.

The Economist said the sale of the stake in OGDCL is thus pivotal. It will not only give the stock market greater depth, but also add to Pakistan’s depleted currency reserves if, as expected, foreigners are the main buyers. The seven further privatization in the pipeline should bring similar benefits. None of them is an oil company.